Irish Competition Authority Decisions

1. An agreement between IAWS-Agri Society Limited (IAWS) and Messrs. Ronan Fitzpatrick, Michael Farrington, Edward Gilmartin Snr., John Farrington, Martin Murphy and T & J Farrington Limited (collectively the Vendors) for the purchase and sale of the entire issued share capital of Unigrain Dublin Limited and Unigrain Foynes Limited (collectively the Unigrain companies) containing certain non-compete provisions, was notified to the Competition Authority on 30 September 1992. The notification requested a certificate or, in the event of a certificate being refused, a licence. The Authority issued a Statement of Objections to the parties on 27 June 1994 indicating its intention to refuse their request for a certificate or a licence. IAWS responded in a letter dated 19 July 1994. They did not request an Oral Hearing.

2. The notification relates to an agreement dated 12 January 1989 between IAWS and the Vendors whereby the Vendors agreed to sell the entire issued share capital of the Unigrain companies to IAWS. The agreement also contains a non-compete provision.

3. IAWS is a public limited company quoted on the Irish Stock Exchange. It has, through its subsidiaries, been a major supplier of materials and services to the Irish agricultural and food industries for over 90 years. The groups' principal operating businesses consist of fish processing, fertilisers, animal feed, energy products and food. Its turnover for the year ended 31 July 1993 was £402m. Unigrain Dublin Limited and Unigrain Foynes Limited are limited companies registered in the State. Prior to the completion of the agreement, the Vendors collectively owned the entire issued share capital of the Unigrain companies.

4. The notification relates to an agreement, dated 12 January 1989, for the sale by the Vendors of the entire share capital of the Unigrain companies to IAWS. Clause 6.01 of the agreement contains a non-compete clause which prevented the vendors from competing with the business or from soliciting employees of IAWS or its subsidiaries for a period 3 years from the completion date. This period expired on 11 January 1992. Clause 6.02 provides that Messrs. Fitzpatrick and Murphy should not compete with the business or solicit its employees for the duration of their employment in the business and for three years after cessation of such employment.

5. The Authority wrote to the parties on 15 July 1993 expressing concerns at the inclusion of post-employment restrictions on Messrs. Fitzpatrick and Murphy. In a letter of reply dated 3 August 1993, the parties stated that Mr. Fitzpatrick's employment with IAWS had terminated on 31 March 1990 and that the post-employment restriction had therefore expired on 31 March 1993. They also referred to the Authority's notice in relation to employee agreements, from which they assumed that the Authority would refuse to accept notification of the restrictive covenants affecting Mr. Murphy.

6. The Authority issued a Statement of Objections to the parties on 27 June 1994 indicating its intention to refuse their request for a certificate or licence. IAWS responded in a letter dated 19 July 1994. In their reply they stated that they disagreed with the Authority's view as expressed in its decision in Carroll's Catering that where a vendor of a business enters into a service agreement with the purchaser it is an important part of the overall sale of business agreement and must be considered part of an agreement between undertakings. They went on:

´We would point out that clearly in the agreement the subject matter of this notification, the employment aspect and the restrictions relating thereto were an important part of the overall sale of business agreement. However whilst in the sale of his interest in his business Mr. Murphy was acting as an undertaking, we would respectively submit that the capacity in which the restrictive covenant under discussion would have bound him was not as an undertaking but as an employee and as the Authority itself has confirmed employees are not undertakings per se........we would submit for the purposes of these particular provisions Mr. Murphy entered into them not as an undertaking but as an employee.

.....In our particular case it was essential from our client's point of view that in acquiring the business it also acquired the services of Martin Murphy. The consideration which our client paid for the acquisition.....related directly to this being part of the transaction and also to Mr. Murphy agreeing to restrictions should his employment with the company be terminated. Our client would not have been prepared to pay the price it paid had this not been part of the equation and indeed might not have gone ahead at all with this particular acquisition.'

They further argued that it was not within the power of the Authority to retrospectively impose different conditions on the parties from those they had entered into in 1989 and stated that if a restriction were not placed on Mr. Murphy for a period following termination of his employment untold damage could be caused to the business. Mr. Murphy replied in a letter dated 21 July 1994 indicating that he was prepared to accept the Authority's proposed decision. None of the parties availed of the opportunity for an Oral Hearing offered to them by the Authority.

7. Section 4(1) of the Competition Act states that 'all agreements between undertakings, decisions by associations of undertakings and concerted practices which have as their object or effect the prevention, restriction or distortion of competition in trade in any goods or services in the State or in any part of the State are prohibited and void'.

8. Section 3(1) of the Competition Act defines an undertaking as ´a person being an individual, a body corporate or an unincorporated body of persons engaged for gain in the production, supply or distribution of goods or the provision of a service.' IAWS is a corporate body engaged for gain and is therefore an undertaking. Unigrain Dublin Limited and Unigrain Foynes Limited are also registered in the State and are also engaged for gain. At the time of the agreement, the Vendors were the beneficial owners of the Unigrain companies and are also, therefore, undertakings. The arrangements therefore constitute an agreement between undertakings.

Sale of Business

9. As the sale of business was completed prior to 1 October, 1991, the date on which the Competition Act came into force, this element of the agreement had been discharged by performance before the Act commenced. The property which was the subject of the agreement had been transferred. In the Authority's view, the prohibition in Section 4(1) only applies to a current or continuing contractual commitment or one entered into subsequent to the coming into force of the Act. As the merger or sale element of the 1991 transaction was discharged prior to the commencement of the Act, that aspect of the arrangements does not come within the scope of Section 4(1).

10. Clause 6.01 of the agreement contains a non-compete provision which prevented the Vendors from competing with IAWS for a period of three years from the completion date and from soliciting employees of the company or its subsidiaries for the same period. The Authority believes that this restriction was designed to secure the transfer of the goodwill of the business and did not offend against section 4(1). Clause 6.02 imposes similar restrictions on Messrs. Fitzpatrick and Murphy for the duration of their employment with IAWS and for three years after cessation of such employment. (As Mr. Fitzpatrick's employment with IAWS ceased on 31 March 1990 and the non-compete clause applied up to 31 March 1993, he is no longer subject to any restrictions. The provision continues to apply to Mr. Murphy who is still employed by IAWS.)

11. IAWS argued that as Mr. Murphy is now an employee, the post-employment restrictions do not constitute an agreement between undertakings and, therefore, the restrictive covenants of the agreement do not come within the scope of the Competition Act and should not be considered by the Authority. However the Authority considers that, in the case of a sale of business, where a vendor enters into a service agreement with the purchaser, such an agreement is an important part of the overall sale of business agreement and must be considered part of that agreement between undertakings. Indeed in their response to the Statement of Objections IAWS clearly indicated that the agreement of the vendors to remain as employees was an essential element of the sale agreement. In this instance, the post employment non-compete provisions are included as part of the sale agreement. In arguing that Mr. Murphy should be considered to be an employee per se and not an undertaking for the purposes of the post-employment restrictions, IAWS are arguing that Mr. Murphy was both an undertaking and not an undertaking within the context of the same agreement. The Authority has previously indicatedthat in such circumstances, a restriction on competing after termination of employment offends against section 4(1) of the Competition Act as it goes beyond what is necessary to secure the transfer of the goodwill of the business. In addition to preventing Mr. Murphy from competing with the business for three years after termination of employment, clause 6.02 also prevents him from soliciting customers or employees of the business for a like period. The Authority has indicated that a restriction on soliciting customers or employees for up to one year after termination of employment would not offend against section 4(1). The restrictions in this case clearly go beyond that. In the Authority's opinion, therefore, clause 6.02 of the agreement offends against section 4(1). While the restriction in the case of Mr. Fitzpatrick expired on 31 March 1993, it offended against section 4(1) from 12 January 1992 up to that time.

12. Under Section 4(2), the Competition Authority may grant a

licence in the case of any agreement or category of agreements which offend against Section 4(1) but which, ´having regard to all relevant market conditions, contributes to improving the production of goods or provision of services or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit and which does not -

(i) impose on the undertakings concerned terms which are not indispensable to the attainment of those objectives;

(ii) afford undertakings the possibility of eliminating competition in respect of a substantial part of the products or services in question.'

13. The Authority believes that where, as part of a sale of business agreement, a vendor becomes an employee of the business, a post-employment non-compete clause does not satisfy the requirements of a licence under section 4(2) since it is not necessary to secure the transfer of the goodwill of the business and it is therefore not indispensable.

14. In the Authority's opinion, IAWS-Agri Society Limited, Messrs. Ronan Fitzpatrick, Michael Farrington, Edward Gilmartin Snr., John Farrington, Martin Murphy and T & J Farrington Limited are undertakings within the meaning of Section 3(1) of the Competition Act, and the notified arrangements for the purchase and sale of the entire issued share capital of Unigrain Dublin Limited and Unigrain Foynes Limited constitute an agreement between undertakings. For the reasons given above, the Authority believes that the restrictions on Mr. Fitzpatrick and Mr. Murphy competing with the business after they cease(d) to be employed by it had or have the effect of preventing, restricting or distorting competition within the State. The agreement therefore offends against Section 4(1) of the Competition Act, 1991 and does not satisfy the conditions necessary for the grant of a licence set out in section 4(2). The Competition Authority has refused to issue a certificate or grant a licence to the agreement of 12 January 1989, between IAWS-Agri Society Limited (IAWS) and Messrs. Ronan Fitzpatrick, Michael Farrington, Edward Gilmartin Snr., John Farrington, Martin Murphy and T & J Farrington Limited (collectively the Vendors), for the purchase and sale of the entire issued share capital of Unigrain Dublin Limited and Unigrain Foynes Limited (collectively the Unigrain companies), (CA/691/92E), notified on 30 September 1992 under section 7 of the Competition Act, 1991.

For the Competition Authority

Patrick Massey

Member

6 September 1994.